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Tuesday, February 25, 2014

Financial Services From the US Postal Service?

About 8% of Americans are "unbanked," and have no bank account, while another 21% are "underbanked," which means that they have a bank account, but also use alternative financial services like payday loans, pawnshops, non-bank check cashing and money orders. The Office of Inspector General of the U.S. Postal Service has published a report asking if the Post Office might be a useful mechanism in "Providing Non-Bank Financial Services for the Underserved." The report points out that the average unbanked or underbanked household household spends $2,412 each year just on interest and fees for alternative financial services, or about $89 billion annually.

I admit that, at first glance, this proposal gives me a sinking feeling. The postal service is facing severe financial difficulties in large part because of the collapse in first-class mail, and it has been scrambling to consider alternatives. After watching the tremors and collapses in the U.S. financial system in recent years, providing financial services seems like a shaky railing to grasp.

But as the Inspector General report points out, a connection from the post office to financial services isn't brand-new. For example, "The Postal Service has played a longstanding role in providing domestic and international money orders. The Postal Service is actually the leader in the U.S. domestic paper money order market, with an approximately 70 percent market share. This is a lucrative business line and demonstrates that the Postal Service already has a direct connection to the underserved, who purchased 109 million money orders in fiscal year (FY) 2012. ... While its domestic and international money orders are currently paper-based, the Postal Service does offer electronic money transfers to nine Latin American countries through the Dinero Seguro® (Spanish for “sure money”) service." For several years now, the Post Office has been selling debit cards, both for American Express and for specific retailers like Amazon, Barnes & Noble, Subway, and Macy’s.

In many countries, the postal service takes deposits and provides financial services. The Universal Postal Union published a report in March 2013 by Alexandre Berthaud and Gisela Davico, "Global Panorama on Postal Financial Inclusion: Key Issues and Business Models," which among more detailed findings notes that 1 billion people around the world in 50 countries do at least some of their banking through postal banking systems. The Universal Postal Union also oversees the International Financial System, which is software that allows a variety of fund transfers across postal operators in more than 60 countries.The U.S. Postal Service is not currently a member. Indeed, the US Inspector General report notes that among high-income countries, the postal services earn on average about 14% of their income from financial services.

The U.S. Postal Service even used to take deposits in the past: "[F]rom 1911 to 1967, the Postal Savings System gave people the opportunity to make savings deposits at designated Post Offices nationwide. The system hit its peak in 1947 with nearly $3.4 billion in savings deposits from more than 4 million customers using more than 8,100 postal units. The system was discontinued in 1967 after a long decline in usage." Essentially, the post office collected deposits and then loaned them along to local banks, taking a small cut of the interest.

There's of course a vision that in the future, everyone will do their banking over the web, often through their cellphones. But especially for people with a weak or nonexistent link to the banking system, the web-based financial future is still some years away. Until then, they will be turning to to cash and physical checks, exchanged at physical locations. However, as the Inspector General report notes, "Banks are closing branches across the country (nearly 2,300 in 2012). ... The closings are heavily hitting low-income communities, including rural and inner-city areas — the places where many of the underserved live. In fact, an astounding 93 percent of the bank branch closings since late 2008 have been in ZIP Codes with below-national median household income levels." Conversely, there are 35,000 Post Offices, stations, branches, and contract units, and "59 percent of Post Offices are in ZIP Codes with one or no bank branches."

There are at least two main challenges in the vision of having the U.S. Postal Service provide nonbank financial services. First, the USPS should do everything on a fee basis. It should not in any way, shape or form be directly making investment or loans--just handling payments. However, it could have partners to provide other kinds of financial services, which leads to the second challenge. There is an anticompetitive temptation when an organization like the Post Office creates partnerships to provide outside services. Potential partners will be willing to pay the Post Office more if they have an exclusive right to sell certain services. Of course, the exclusive right also gives them an ability to charge higher fees, which is why they can pay the Post Office more and still earn higher profits. But the intended beneficiaries of the financial services end up paying higher fees. Thus, if the US Postal Service is going to make space for ATM machines, or selling and reloading debit cards, or cashing checks, it should always be seeking to offer a choice between three or more providers of such services, not just a single financial services partner. To put it another way, if the Postal Service is linked to a single provider of financial services, then the reputation of the Postal Service is hostage to how the provider performs. It's much better if the Postal Service acts as an honest broker, collecting its fees for facilitating payments and transactions in a setting where people can always switch between multiple providers.

Finally, there is at least one additional benefit worth noting. Many communities lack safe spaces: safe for play, safe for walking down the street, safe for carrying out a financial transaction with minimal fear of fraud or assault. Having post offices provide financial services could be one part of an overall social effort for adding to the number of safe spaces in these communities.